LSB Industries, Inc.

Greetings and welcome to the LSB industry's second quarter 2025 earnings conference call. At this time, all participants on our listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christy Carver, Senior Vice President and Treasurer. Thank you.

You may begin. Good morning, everyone. Joining me today are Mark Behrman, our Chairman and Chief Executive Officer, Cheryl McGuire, our Chief Financial Officer, and Damian Renwick, our Chief Commercial Officer. Please note that today's call includes forward-looking statements. These statements are based on the company's current intent, expectations, and projections. They are not guarantees of future performance, and a variety of factors could cause the actual results to differ materially. For more information about the risks and uncertainties that could cause actual results to differ materially from those projected or implied by forward-looking statements, please see the risk factors set forth in the company's most recent annual report, Form 10-K. On the call today, we will reference non-GAP results. Please see the press release posted yesterday in the Investors section of our website, lsbindustries.com, for further information regarding forward-looking statements and reconciliations of non-GAP results to GAP results. At this time, I'd like to turn the call over to Mark.

Thank you, Christy, and good morning, everyone. Page 4 of our presentation summarizes highlights from the second quarter. Sales volumes increased 6% year over year, driven by solid improvement in sales volumes of AN and UAN. These gains are the result of higher ammonia production and better performance by our upgrading plans. We're pleased that our efforts to improve the reliability and efficiency of our facilities are yielding results, and we expect to make further progress in the second half of 2025. We achieved our increase in production and sales volumes during the second quarter, while having zero recordable injuries across the organization. I want to congratulate our entire team for embracing our Protect What Matters core value and demonstrating that Goal Zero is achievable. Lastly, we continue to focus on our allocation of capital, and during the quarter, we not only invested in supporting the growth and improvement in our business, but we bought back $32 million of debt. Cheryl will provide a few more details on our leverage. Now I'll turn the call over to Damian to review current market dynamics and pricing trends. Damian?

Thanks, Mark, and good morning, everyone. Turning to page 5, demand for our industrial products remains robust. We continue to ramp up our ammonium nitrate solution volumes as we expand our industrial business. Copper and gold mining activity remains strong, with pricing for both near all-time highs. We continue making progress optimizing our sales mix, targeting a third of our sales under cost-plus contracts, further neutralizing the volatility of natural gas and fertilizer price swings. To achieve this mix shift, in early July, we began transitioning our sales of HDAN, a spot-price fertilizer product, to ANS used in industrial and mining applications. We expect to wrap up our production of HDAN later in the third quarter. We believe this shift will improve stability and predictability in our financial performance. Nitric acid demand remains strong, supported by the resilience of the US economy. In addition, we believe that the proposed countervailing duties on Chinese imports of MDI, a polyurethane feedstock, could drive a favorable structural change in the domestic MDI market, leading to higher nitric acid demand. On page 6, we continue to see strong prices for our fertilizer products. The spring 2025 planting season resulted in strong demand and pricing for nitrogen fertilizers. This was due, in part, to the expected increase in planted corn acres, driven by continued low corn -to-use ratios. The USDA estimates US producers planted 95.2 million acres of corn this year, compared to 90.6 million planted acres last year. UAN prices erupted significantly from a year ago. The current NOLA UAN price of $350 per ton is more than 70% higher than this time last year. The Tampa ammonia price for August is $487 per ton, slightly above year-ago levels. This increase reflects reduced supply from the Middle East, North Africa and Russia, and higher European production costs. Tight global supply is expected to continue in the short term. Now I'll turn the call over to Cheryl to discuss our second quarter financial results and our outlook. Cheryl?

Thanks, Damien, and good morning. On page 7, you'll see a summary of our second quarter 2025 financial results. You can see the early benefits of our investments in plant reliability and efficiency through increased net sales and stronger volumes. Page 8 bridges our second quarter 2024 adjusted EBITDA of $42 million to our second quarter 2025 adjusted EBITDA of $38 million. Higher pricing for UAN, higher sales volumes, and a reduction in our fixed plant costs were offset by materially higher natural gas costs. Page 9 provides a summary of our key balance sheet and cash flow metrics. Our cash balance remains strong. During the quarter, we repurchased approximately $32 million of our senior secured notes, and additionally, we have an equipment loan coming due in August and will reduce debt by an additional $25 million in the third quarter. Our second quarter 2025 CAPEX reflects investments in ANS loading and storage capabilities at our El Dorado facility. This will enable us to meet the strong demand for the product that Damien mentioned earlier. We will continue to make investments in the reliability of our facilities while also investing in storage and logistics capabilities to support our growing industrial business. Turning to the third quarter outlook, the Tampa ammonia price settled at $487 for August, an increase of $70 a ton over July's price, and NOLA UAN is currently trading around $350 per ton. Our natural gas costs have averaged approximately $3.25 per MMBTU quarter to date. Higher than our average gas cost of $2.40 in the third quarter of last year, however, we expect third quarter gas prices to be less of a headwind to our year over year comparison relative to what we experienced in the first half of 2025 based on pricing we are seeing thus far in the third quarter. From a volume perspective, we continue to expect meaningful increases in both UAN and AN sales volumes compared to prior year. This will result in lower sales volumes of ammonia as we forgo ammonia sales in favor of upgrading into higher margin products. Collectively, we expect these favorable dynamics to result in a healthy year over year increase in adjusted EVDA as compared to the third quarter of last year. And now I'll turn it back over to Mark.

Mark Thank you, Cheryl. Page 10 is an overview of the low carbon project at El Dorado. Our partner, Lapis Carbon Solutions, completed the drilling of a stratigraphic injection well in June. Lapis continues to gather data from this well to support the EPA and its continuing technical review of our Class 6 permit application with technical review expected to be complete in the first quarter of next year. We are expecting to use the same well for our CO2 injections when in operation. We continue to expect to begin CO2 injections by the end of next year. We were pleased with the progress that we made in the first half of 2025 towards meeting our goals for the full year. We continue to generate increasing ammonia, UAN, and AN volumes, and we achieved higher sales volumes of our higher margin products. We're successfully shifting our sales mix to an increasing percentage of contractual industrial sales, which enables us to pass through our natural gas costs and provides us with a more stable base of earnings with multi-year visibility. As I mentioned at the start, our safety performance was excellent with zero recordable incidents so far this year, and we expect that to continue. Lastly, we reduced our debt further and maintained a healthy liquidity position while continuing to invest in plant reliability and strategic projects. I am enthusiastic about our prospects for the remainder of the year and look forward to our continued progress of improving our business and generating improved financial results. Before we open it up for questions, I'd like to mention that we will be participating in the following events in the coming months, the Jefferies Industrial Conference in New York on September 3rd and the UBS Global Materials Conference also in New York on September 4th. We look forward to seeing some of you at those events. That concludes our prepared remarks and we will now be happy to take your questions. Thank you.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Formation tone will indicate that your line is in the question queue. We ask that analysts limit themselves to one question and a follow-up so that others may have the opportunity to do so as well. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Lucas Guimont with UBS. Please proceed with your question.

Good morning. Thank you. Just wanted to start on UAM. So the first half volumes were up sort of about 30,000 tons year on year. Coming into the year, you were looking to kind of potentially lift volumes up to 150,000 tons initially. How do you see sort of the outlook there for the second half now in terms of the size of the growth that you think you can generate and what are you kind of doing to maximize that and capitalize on the really strong relative UAN processing that we're seeing at the moment?

Morning Lucas. How are you? So yeah, we, as you probably remember, we did an expansion of our UAN production back in September of last year up at our prior facility. And while we're getting the maximum rates that we expected, we're still working out some kinks to do it consistently. So I think we're pleased that the plant itself operates at the higher rate and has been fairly consistent, but we're still working on that. So I think we have expectations that the second half of the year should have higher UAN production out of that facility and then therefore higher sales. Remember, though, we do have seasonality that we'll have to deal with. The first half of the year, usually you're going to see more products sold in the second half of year.

Great. And then I just wanted to ask about the setup for the third quarter. So I mean, typically that has a lot more sort of industrial sort of mix, less ag mix, and it's usually sort of the smallest quarter for the year, seasonally. Just this year, though, we've sort of got some divergent dynamics compared to normal. So UAN pricing has been really strong. It's continued to increase into July. Pneumonia pricing has sort of been stable and you should sort of get it sort of also some volume uplift. So it seems to me the combination of those factors could have even potentially even like flight sequentially on the second quarter or at least seeing a much less of a decline than you would normally get. How are you guys kind of thinking about things there?

I think you're spot on.

Our next question comes from Andrew Wong with RBC Capital Markets. Please proceed with your question.

Hey, good morning. Thanks for taking my questions. So we've seen improvement in production and operating rates now, and I think you're pretty far down the path for off-grocer improvements, which is great. Maybe you can just talk about more like on the cost side of things as those operating rates stabilize, where do you see costs trending over time? I think there are some costs that are tied to the improvement programs as well, like contractors and consultants and things like that. So as those require costs kind of fall off, like what can we expect on the overall cost?

I think. Good morning, Andrew. How are you? So first off, yeah, we've made a lot of improvements on the operational side, but we still have a lot of initiatives going on that we believe can still add significant EBITDA to our annual EBITDA to where we are today. I mean, the goal for our ammonia plants is 95% consistently. Right. Reliability is really key. The goal for our upgrading plants is generally speaking, you know, improve from where we are today. So I do think we still have some significant improvement that we can make that should translate into meaningful increase in EBITDA. On the cost side, I'm going to turn it over to Cheryl. We have a lot of initiatives going on because we are now focused on not only just pulling costs out, but really creating efficiencies throughout the business that by themselves will create cost decreases.

Yeah. Good morning, Andrew. We had said coming into this year that we would expect our costs to reach an inflection point in 2025 and then start trending down from there. In addition to that, we talked about 15 to 20 million of cost reduction through efficiencies, as Mark just mentioned. So we should be, you know, we're starting to work on that now. I think by the end of the year, we'll probably be, I would say, 25% complete towards the 15 to 20 million target that we're looking for. So we'll see the balance of that come out across 26 and maybe a bit into 27.

And I would say one thing to add to that, you know, keep in mind that when you make some changes now, we're not going to see the annualized benefit, obviously, until next year. So while we pull, we're working on those initiatives today, we'll probably be able to afford at the end of the year what the annualized effect is going into 2026.

Okay, got it. That makes sense. And yeah, obviously, I appreciate there are still certain levers you can pull to improve operating rates here. And then just going onto the tariffs, what's your sense on the impact from tariffs on US nitrogen prices so far this year versus just how tight the market was with the trend of demand and some of the supply issues. And then just as you touched on in your prepared remarks, with the insuring on some of the industrial businesses, that's definitely impacted demand domestically. Can you just talk about what that might mean for pricing and margins for LSB if you can help quantify it? That'd be great in any way you can.

Damian, you want to answer that?

Yeah. Good morning, Andrew. So in terms of the tariffs, I think it's honestly been a little hard to discern some of the impacts given some of the more pertinent market dynamics around supply and also being in the peak season of demand. But I think from a Eurea perspective, there's been, I think, some impact for the other products, probably not so much. Going forward, I think we're closely monitoring what happens with Russia, if there's any sort of tariff there and then any adjacent tariffs for other countries doing business with Russia, that's likely to have a more meaningful impact on nitrogen. So we're closely monitoring that. In terms of the on-shoring of production here in the US, look, that's going to have a long runway until we start seeing anything material. I think in the shorter term, there are opportunities for the US domestic market to take advantage of the current environment. We're seeing that a little bit with copper at the moment, right? Like the support for US copper domestically is seeing producers like Freeport and others really focus on driving their efforts there and exploring with some priority expansion activities there. So I think that's certainly a tailwind for us and something that we're looking forward to seeing realised in the future.

I would add on to that, that those activities make us really look at some potential de-bottlenecking or expansion because they underpin some of those expansions.

Our next question comes from Lawrence Alexander with Jeffries. Please proceed with your question.

Hi, this is Kevin S. for Lawrence. Thank you for taking my questions. I guess my first one has to do with fertiliser prices. They've been pretty elevated like UAON. I guess there's been some deterioration of farmer economics and that's I think largely because of lower corn prices. Are you seeing any signs of demand destruction, let's say as of July, from the farmer perspective of UAON?

Yeah, hi Kevin. Really, as we got through spring season, we really didn't see much demand destruction at all. But moving through to fill, I think given where prices are, there's certainly some hesitancy from a retailer's perspective to buy. But I think that's really been consistent with what we've seen for the last three or four years. So it's probably more the new normal that we're seeing. You know, and we're in a comfortable position coming out of spring with our inventory and we're comfortable with where our forward sales are sitting. But we're monitoring it. Corn prices, we'd like to see a little higher and that would help support farmer economics. But you might see a bit of an impact on the edges and that marginal corn plantings for next year. So yeah, and I think the USDA is already sort of indicating some of that in its outlook.

I think one thing that could possibly help corn prices, so we just negotiated a deal with the EU for them to purchase a lot of energy as part of that. I think the hope is that we'll see some ethanol being exported over to Europe, which will increase demand for ethanol and in turn demand for corn. So again, I think that plus, you know, there's the continued conversation going from E10 to E15 and gasoline could support some more demand from the ethanol industry and then supporting demand for corn.

Okay, great. Thank you. And my second question, so I asked about this on last quarter's call on the administration's deregulation push. I guess I was wondering whether or not your views have changed over the last three months and basically how big of a taliment it could or could not be. Like have you noticed any substantial changes yet like in terms of permitting, for example?

Well, we've seen much more dialogue with the federal agencies, particularly the EPA and then state agencies that, you know, maybe were a little hesitant given the actions of the EPA and the government over, you know, the federal government oversight. I think both state agencies and federal agencies have been more user-friendly and so that's actually helped us in some of our conversations just on environmental conversations at the sites and with projects, things like that. Got it.

Okay. If you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Rob McGuire with Granite Research. Please proceed with your question.

Good morning. Morning,

Rob.

Morning, Mark. UAN, can you kind of tell us what you're seeing in terms of UAN import trends and, you know, do you have any comments on the June, July Ukrainian strikes and, you know, on the Russian fertilizer plants? Has there been any discussion about how that's impacting Russian export volumes?

Benjamin, you want to take that? Yeah. Good morning, Rob. So in terms of the import trend this year, fertilizer year imports for UAN were below last year and I think that contributed to some of the tightness that we saw overall in the market. In terms of the drone strikes, etc., we haven't seen any immediate impact just yet and maybe that's because of where we're at seasonally, you know, transitioning into the next year and the field period and, of course, there's still been no field programs announced in the market. So that is an indication of how well balanced or comfortable the producers are at this stage. But it's clearly something that we're monitoring but I think the bigger factor will be those tariffs that I talked about earlier. That's something that will have a more material impact going forward.

And I also think, don't you think that, you know, the European tariffs on Russia, as they gain some momentum and, of course, the tariff rates and amounts go up will have a huge impact?

Yeah, it'll certainly see a redistribution of global trade routes for UAN. So I think it'll just see a shuffling. You might see some pricing impact as freight rates are impacted on the global trade but, yeah, we've yet to see any immediate impact from that.

Well, thank you for that. And then totally different topic, lidos. Any changes with lidos at this point in time that you could share with us, the lawsuit?

No, we are at least currently scheduled to go to trial. You know, start the trial in late October, subject to our judiciary system making any changes.

As a reminder, if you would like to ask a question, please press star one on your telephone keypad.

Great.

Well, here are no other questions. I want to thank everyone for participating on our Q2 earnings call and your interest in LSB industries. Thanks.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.